Stocks quoted in this article:
Microsoft (MSFT – 58-3/8) confirmed early this morning that its is in a multi-year deal with video game manufacturer Electronic Arts (ERTS - 41-11/16). ERTS will develop up to 10 titles for MSFT's video game console Xbox, due for release next fall. Ahead of the news, ERTS shares posted an almost five-percent gain in yesterday's regular session and look poised to open higher this morning.
On the options front for ERTS, the soon-to-expire December 40 put is the site of peak open interest, with 708 contracts currently open. Looking ahead to the January series, the 57-1/2 call is currently the site of peak open interest with 1,974 contracts. The near-the-money January 40 put is the second-most active, home to 1,081 open positions. The January 45 call has 1,062 open contracts in residence.
Looking at implied volatilities on the out-of-the-money December 45 call and the out-of-the-money December 40 put, it is evidenced that puts have been in greater demand of late. The call's implied volatility stands at around 130 percent, while the implied reading on the put position weighs in at 196 percent. Both compare with a 10-day historical volatility on the stock of about 75 percent. This notable pessimism from the options crowd bodes well for the equity's short-term outlook, in our contrarian view.